What is buildings insurance?
Buildings insurance should cover all or the majority of costs relating to structural damage to a property if an effective claim is to be made. This would include loss or destruction of, or damage to the building or buildings and grounds at the risk address stated in the schedule.
- outbuildings attached to or detached from the main building;
- walls, gates or fences around the buildings and belonging to them;
- landlord’s fixtures and fittings; and
- car parks, yards, paved areas, roads, pavements and footpaths.
Although buildings insurance is only usually required to cover the cost of works to the property, it also needs to provide a level of cover that meets the entire cost of rebuilding the block of flats it applies to.
This is particularly important in leasehold property where the terms of the lease make the landlord or manager responsible for arranging the buildings insurance. The reason for this is that the landlord or manager is best placed to arrange the buildings insurance to provide cover for the block of flats or perhaps even for an entire estate. It is no longer possible for the lease to give the landlord the right to arrange leaseholders’ contents insurance and therefore the leaseholders need to arrange this themselves if they wish.
Private landlords or managers, where a lease gives them contractual responsibility for arranging buildings insurance, must be authorised to do this by the Financial Conduct Authority.
What is the scope of the buildings insurance policy?
The leaseholder should consider the scope of the landlord or manager’s buildings insurance policy as it may not extend to damage to their own flat that is due to disrepair from a neighbour’s flat. This is often known as third-party liability and leaseholders should check whether it applies to their block. Most insurance providers offer different levels of cover and ideally the landlord or manager should find a policy comprehensive enough to cover the majority of the cost of any unforeseen damage to the communal parts and the leaseholder’s own flat.
What is covered by buildings insurance rather than contents insurance?
Buildings insurance provides cover for all of the structural aspects of the building, and for permanent fixtures and fittings such as baths and fitted kitchens.
Contents insurance provides cover for the flat-owners’ possessions, such as their furniture, clothing and electrical goods such as computers. Whilst it is generally straightforward to determine whether an item would be covered by the buildings insurance or the contents insurance, there are some occasions where doubt may arise. The test is whether the item can be reasonably be removed and taken to another property. If it can, then it would be regarded as part of the contents of the flat and it would not usually be covered by the buildings insurance policy.
The Leaseholder Association (LA) would advise anyone purchasing contents insurance to check in advance what it covers as there are items such as floor coverings or outside aerials which may not fit into the criteria of whether they can be easily removed.
If the leaseholder has contents cover, and the item claimed for is not specifically excluded by this policy or the buildings insurance arranged by the landlord or manager, then the insurers should be able to negotiate and settle between them who should deal with the claim. Where there is a dispute about which insurer is responsible for covering a particular item, the Financial Ombudsman Service recommends that each insurance company should meet 50% of the claim.
What level of buildings insurance should leaseholders expect to pay?
As there is a legal requirement for the costs the landlord or manager includes in the service charges to be reasonable this would apply to the buildings insurance premium or any other insurance they arrange. There is no legal definition of what might be reasonable and if any dispute on the insurance premium cannot be settled between the parties it can be referred to a First-tier Tribunal (FTT). As the market for providing buildings insurance is very competitive the landlord or manager should have little difficulty in obtaining the best value for leaseholders.
Is consultation required when the landlord or manager chooses an insurer?
The current level of premiums for buildings insurance suggests that statutory consultation with leaseholders would be required as the annual cost would exceed the prescribed amount of £100 for any one leaseholder. However, as most insurance premiums are negotiated annually and landlords or managers only have to consult with leaseholders when it is proposed to enter into an agreement of more than 12 months, in most cases statutory consultation will not be necessary. (Please see the LA Information Sheet 109 Section 20 Consultation for full details of circumstances in which the consultation process is required).
What is commission and is it acceptable?
he provision of insurance has been identified as one of the most common service charge items likely to be subject to commission. Commission means that the landlord or manager receives a payment in return for placing the insurance with that particular company. It is an accepted legal principle that in dealing with service charge monies, the landlord or manager should receive no more than a reasonable commission for dealing with insurance on the leaseholders’ behalf, which may include a profit or surplus element. Receiving commission is not specifically prohibited by legislation but the following good practice guidance below may be helpful in resolving any disputes regarding this matter.
The landlord or manager should not arrange insurance on behalf of leaseholders in order to increase the level of commission or to benefit from any income or favour.
Receipt of a commission or any other similar payment by the landlord or manager is permissible but only if:
- it is in receipt as compensation for services provided that relates to the amount of commission received;
- the cost of providing those services is not also part of the landlord or manager’s management fee; and
- it is disclosed as the amount of commission received and as a percentage of the premium payable to the leaseholders annually without them needing to make a written request.
The disclosure regarding insurance commission should also include details of the authorisation held by the landlord or manager under the rules of the Financial Conduct Authority.
What information must be provided by the landlord or manager?
The landlord or manager must provide a summary of the buildings insurance cover if a written request is received from a leaseholder or the secretary of a recognised residents' association. Leaseholders also have a legal right to request evidence of payment of premiums and to carry out an inspection of the insurance policy documents.
The landlord or manager must comply within 21 days of receiving the request and the summary must show:
- the sum for which the property is insured;
- the name and details of the insurer; and
- the risks covered in the policy.
The landlord or manager is only required to provide the summary of buildings insurance cover once in each insurance period, which will usually mean once each year.
Where the request is for inspection of the policy, the landlord or manager must provide reasonable access for this inspection and allow access to all relevant documents, which show evidence of payment, including receipts and provide facilities for copying them.
Alternatively, a request may be for the landlord or manager to provide the copies of the insurance policy and accompanying documents. This means they will send them to the leaseholder or residents’ association secretary or arrange for them to be collected.
The provision of inspection and copying facilities may be regarded as a reasonable management cost and therefore the landlord or manager would seek to recover this through service charges, if this is not included in the management fees.
What action could be taken if the landlord or manager does not comply with the above?
If a landlord or manager fails, without a reasonable excuse, to comply with a request for insurance details or fails to allow an inspection or permit the leaseholders to have copies of the policy or related documents, this is a criminal offence. The LA should be contacted for advice before proceeding with this type of action.
How can buildings insurance premiums be challenged?
As buildings insurance premiums are usually recovered as part of the service charges the costs of this insurance may be challenged by an application to the FTT if the leaseholder considers the costs unreasonable. As the landlord or manager would usually be aware of the costs of this insurance before each accounting year they will be part of service charges payable in advance which can be challenged at an FTT. However, The LA suggests negotiation with the landlord or manager before taking this formal action and advises leaseholders to obtain quotes from other insurers to allow comparisons before challenging the level of premiums.
Any leaseholder whose lease requires them to use an insurer nominated by the landlord has the right to apply to an FTT for an order that requires the landlord to use a different insurer. The order will only be granted by an FTT if they decide that the insurer is unsatisfactory or that the premiums they are demanding, including commissions or brokerage fees, are found to be unreasonable.
Who makes a claim on the buildings insurance?
The terms of the lease should be checked to see if it clarifies who is responsible for making a claim. In most cases it is the landlord or manager who would need to make the claim particularly if it relates to the communal parts of the building. However, unless there is on-site staff, the landlord or manager is relying on the leaseholders to report any disrepair and they should have written procedures regarding this.
What information should be provided when the landlord or manager makes a claim?
Although it is not a statutory requirement, the landlord or manager should notify the leaseholders when a claim is being made on the buildings insurance. If, as in most cases, it is a claim that would have an effect on the service charge, the landlord or manager should keep leaseholders informed on the progress of the claim. Once the claim is settled, the landlord or manager should be prepared to inform the leaseholders of the total amount of the settlement, approximately when they should receive it, any excess and any significant implications for future premiums.
What is an excess?
An excess is an agreed level of contribution the policy holder is required to make in respect of a successful claim. It may be possible to obtain insurance policies that do not include an excess but this inevitably means that the premiums will be significantly more expensive. It is often the case that when the landlord or manager arranges the insurance there is an excess that the lease allows to be recovered from the service charges.
What other insurance might be arranged by the landlord or manager?
In addition to the standard buildings insurance cover, the terms of the lease may require the following to be arranged by the landlord or manager and for the cost to be met by the leaseholders:
- A level of buildings insurance that covers the cost of providing suitable alternative accommodation for the flat-owners or flat-occupiers, in the event of their property becoming uninhabitable.
- Engineering plant insurance to cover major items in communal areas of flats that might not be covered by a standard buildings insurance policy, such as lifts.
- Public liability insurance, which may relate to visitors or any staff the landlord or manager employs.
- Terrorism cover.
- Contents insurance for the communal areas of the building, if any.
Please see the LA information sheet 101 Glossary for a precise explanation of the terms used in this information sheet. Whilst the above provides general information on this subject it is strongly recommended to obtain independent professional advice before proceeding with any formal action to challenge insurance.
Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.
Info Sheet: 107/2/15 ©Copyright